EDITORIAL: The Confidence Game

Marcus Webb

“Our economy is not a con game; it is a confidence game.”

So says Paul Volker, former chairman of the U.S. Federal Reserve under presidents Carter and Reagan. Today, Volker chairs Barack Obama’s newly formed Economic Recovery Advisory Board. His description of the economy as a “confidence game” carries special lessons for an industry that is built on games (and music).

Just exactly what variation of Voker’s game are we playing in this industry? For years, many manufacturer sales reps appeared to be playing musical chairs.

Today, some operators are clearly playing Monopoly, seeking to tie up the rights to control all the best locations in their regions.

I’m not being flippant. Calling something a game is no sign of disrespect, as evidenced by Volker. Whatever game our industry is playing – be it musical chairs, Monopoly or a confidence game – the game itself is utterly serious, and its object is always the same: Get the money.

How much money is in the U.S. economy today? Although the annual gross domestic product is $14.5 trillion, the U.S. money supply is far behind it: $8.5 trillion dollars. Most of this money exists as electronic bits and bytes, flowing from one computer to another.

The industry, for the most part, pursues its money in the form of cash. From 1997 to 2007, America’s cash supply more than doubled from $350 billion to about $750 billion. So the good news is, there is more cash out there to chase than ever before.

Where is the available cash? Well, more than half a trillion dollars (that is tangible, physical dollars) are overseas. Only about $250 billion of the U.S. cash supply is actually floating around America. What’s more, only half of that is in banknotes and currency. The rest is bank reserves, plus demand accounts that can be instantly converted to cash. On the other hand, this money circulates. It is spent over and over, passing from hand to hand, company to company, throughout each fiscal year.

According to VT’s latest Census, which measured industry economic activity in 2007, the U.S. vending industry did $47.5 billion in annual revenues while the amusements industry generated $6.14 billion. The combined total is $53.6 billion. Since the total amount of bills and coins in American wallets is something like $125 billion, it could be said that both vending and amusements captures 43% of the total cash available in the U.S.

Let’s return briefly to Volker’s description again. If America’s economy is a confidence game, what does that mean, exactly? One writer put it this way: “It’s all about trust and faith. It’s almost metaphysical… [If basic trust in the system is compromised, then people] panic. They lose their faith. They lose their trust.” And when that happens, this observer added, people around the world don’t want dollars; they want yen or Euros. Or if they are simple working folks who live from paycheck to paycheck, they simply stop spending and hold onto whatever cash they’ve got.

Now, let’s take all of this back to the great American tavern, where so much of the industry’s money is collected in bills and coins that go into pool tables, jukeboxes, videos and assorted other amusements. What does Volker’s confidence game mean for the operator, the distributor and the manufacturer?

First, it means that despite all the cash available on the streets today, if we remain a mostly cash industry we are restricting ourselves to an increasingly smaller slice of the total available spending power of the U.S. public. Less than one dollar in 20 of America’s money supply – $125 billion of the $8.5 trillion – is actually available as physical cash within the U.S. itself. More than 90% of America’s cash transactions are processed via electronic funds.

That alone is a strong argument for shifting, or at least expanding, the amusements industry from cash to credit and debit payments. This industry should “go where the money is,” and as far as the U.S. consumer economy is concerned, nearly all the money is in debit and credit cards.

Second, today’s troubled economy means that even though Americans have more physical cash to spend today than ever before, they are also holding onto that cash more tightly than they have since the Great Depression and World War II. For proof, ask the retailers who have just come through, or have just been bankrupted by, the worst holiday sales season in memory during the fourth quarter of 2008.

Finally, Americans’ reluctance to spend means that consumers are demanding more value for each dollar than ever before. What does $5 mean to a U.S. workingman or a working mom today? It means three gallons of gas. It means 1.25 gallons of milk. It means a few hours of heat during cold winter months.

How do these purchases compare in value to a glass of beer at the local tavern, plus a game of pool and a few songs on the jukebox? In hard times, people seek cheap entertainment. Will that mean free TV and home videogames with the family, or a couple of hours of billiards and brew with the gang down at the neighborhood watering hole?

The answer to that question will define the outcome of the amusement industry’s own confidence game.